Problem 14-21, p. 490, 11th. Canadian Edition
The following errors or fraud and other irregularities are included in the accounting records of Joyce
Manufacturing Ltd.:
1. The credit limit for a new customer was entered as $20,000 rather than $2,000 in the
customer master file.
2. A material sale was unintentionally recorded for the second time on the last day of the year.
The sale had originally been recorded two days earlier.
3. Cash paid on accounts receivable was stolen by the mail clerk when the mail was opened.
4. Cash paid on accounts receivable that had been prelisted by a secretary was stolen by the
bookkeeper who enter cash receipts and accounts receivable in the accounts receivable
system. He failed to enter the transactions.
5. A shipment to a customer was not billed because of the loss of the bill of lading.
6. Merchandise was shipped to a customer, but no bill of lading was prepared. Since billings are
prepared from bills of lading, the customer was not billed.
7. A sale to a retail customer was unintentionally classified as a commercial sale.
REQUIRED
1. Identify whether each misstatement is an error, a fraud, or other irregularity.
2. For each misstatement, state a control that should have prevented it from occurring on a
continuing basis.
3. For each misstatement, state an audit procedure that could uncover it.
Sales Cycle Solutions-1
Solution to 14.21
1
a. Type of
Misstatement
Error
b. Control
c. Procedure
Print a list of all master file changes for independent
verification.
Sales invoices are prenumbered, properly accounted
for in the sales journal, and a notation on the invoice is
made of entry into the sales journal.
All payments from customers should be in the form of
a cheque payable to the company. Monthly statements
should be sent to all customers.
The listing of cash received should be compared to the
postings in the accounts receivable master file and to
the validated bank deposit slip.
Use of prenumbered bills of lading that are
periodically accounted for.
Compare approved master file change form to listing
of master file.
Account for numerical sequence of invoices recorded
in the sales journal, watching for duplicates. Confirm
accounts receivable at year-end.
Trace from recorded sales transactions to cash
receipts for those sales; confirm accounts receivable
balances at year end.
Trace cash received from prelisting to cash receipts
journal. Confirm accounts receivable.
2.
Error
3.
Fraud
4.
Fraud
5.
Error
6.
Error
No merchandise may leave the plant without the
preparation of a prenumbered bill of lading.
7.
Error
Internal review and verification by an independent
person.
Trace a sequence of prenumbered bills of lading to
recorded sales transactions. Confirm accounts
receivable at year end.
Trace credit entries in the perpetual inventory records
to bills of lading and the sales journal. Confirm
accounts receivable at year end.
Test accuracy of invoice classification.
Sales Cycle Solutions-2
Problem 12-22, page 403
YourTeam.com is an online retailer of college and professional sports team memorabilia, such as hats,
shirts, pennants, and other sports logo products. Consumers select the university, college, or
professional team from a pull-down menu on the company’s website. For each listed item, the website
provides a product description, picture, and price for all products sold online. Customers click on the
product number of the items they wish to purchase. YourTeam.com has established the following
internal controls for its online sales:
1. Only products shown on the website can be purchased online. Other company products not
shown on the website are unavailable for online sale.
2. The online sales system is linked to the perpetual inventory system that verifies quantities on
hand before processing the sale.
3. Before the sale is authorized, YourTeam.com obtains credit card authorization codes
electronically from the credit card agency.
4. Online sales are rejected if the customer’s shipping address does not match the credit card’s
billing address.
5. Before the sale is finalized, the online screen shows the product name, description, unit price,
and total sales price for the online transaction. Customers must click on the Accept or Reject
sales button to indicate approval or rejection of the online sale.
6. Once customers approve the online sale, the online sales system generates a Pending Sales
file, which is an online data file that is used by warehouse personnel to process shipments.
Online sales are not recorded in the sales journal until warehouse personnel enter the bill of
lading number and date of shipment into the Pending Sales data file.
Sales Cycle Solutions-3
REQUIRED:
a.
For each control, identify the transaction-related audit objective(s) being fulfilled if each
control is in effect.
b.
For each control, describe potential financial misstatements that could occur if the control
were not present.
c.
For each control, identify an important general control that would affect the quality of the
control.
d.
For each control, list a test of control to test its effectiveness.
Sales Cycle Solutions-4
Solution to 12-22
a.
b. Misstatement or Error Prevented
c. General Control Needed
d. Audit Test
1. Occurrence
Accuracy
Sales may be recorded for invalid or
non-existent products.
Sales may be processed on inaccurate
price information.
Sales may be recorded for invalid or
non-existent products.
Sales may be processed for existing
products using quantities ordered, even
when ordered quantities are not on
hand.
Sales may be processed for customers
who are unable to pay.
Access controls: only authorized
individuals may access master files
(e.g., use passwords).
Review password access tables to
ensure that only authorized
individuals can access master
files.
Use computer-assisted audit
techniques to scan inventory files
for inventory quantities that are
less than zero.
4. Occurrence
Shipments may be made to persons
making an unauthorized credit card
purchase (e.g., with a stolen credit
card).
Segregation of duties: only authorized
personnel should have access to
physical media (e.g., hard drives) on
which data is stored.
5. Accuracy
Sales may be processed inaccurately
(e.g., wrong product, wrong price,
wrong quantity).
6. Occurrence
Timing
Sales may be recorded even though
shipment has not occurred.
Sales may be recorded in the wrong
time period.
Program change controls: only
authorized changes should be made to
programs that perform calculations,
e.g., calculating invoice totals.
Access controls: only authorized
individuals should be allowed to enter
shipping information.
2. Occurrence
Accuracy
3. Occurrence
Program change controls: only
authorized changes should be made to
programs that perform calculations
(e.g., reducing inventory for shipped
orders).
Access controls: only secure
information should be sent/received to
or from credit card companies.
Computer-assisted audit
techniques should be used to list
any accounts receivable amounts
for internet sales that have been
outstanding for more than 30
days.
Use computer-assisted audit
techniques to list any customers
where the credit card billing
address is different from the
shipping address.
Complete a test order on the
internet to ensure that the accept
and reject buttons are functioning
correctly.
Use computer-assisted audit
techniques to list the pending file
as of the year end date. Trace to
subsequent sales documents.
Sales Cycle Solutions-5
d.
Other audit procedures that could be performed are:
• test extensions on attached sales invoices for clerical accuracy
(Valuation)
• test time delay between warehouse removal slip date and billing date
for timeliness of billing (Timing)
• trace entries into perpetual inventory records to determine that
inventory is properly relieved for shipments (Posting and
summarization)
e.
The test performed in part c. cannot be used to test the existence of
sales because the auditor already knows that inventory was shipped
for these sales. To test the validity of sales, the sales invoice entry in
the sales journal is the sampling unit. Since the sales invoice
numbers are not identical to the warehouse removal slips it would
be improper to use the same sample.
Sales Cycle Solutions-6
Problem 12-27, page 405
The following are auditor judgments and audit sampling results for six populations. Assume large
population sizes.
1
2
3
4
5
6
EPER (in percentage)
2
0
3
1
1
8
TER (in percentage)
6
3
8
5
20
15
ARACR (in percentage)
5
5
10
5
10
10
100
100
60
100
20
60
2
0
1
4
1
8
Actual sample size
Actual number of exceptions
in the sample
REQUIRED
a. For each population, did the auditor select a smaller sample size than is indicated by using attribute
sampling tables for determining sample size? Evaluate, selecting either a larger or smaller size than
those determined in the tables.
b. Calculate SER and CUER for each population.
c. For which of the six populations should the sample results be considered unacceptable? What options
are available to the auditor?
d. Why is analysis of the exceptions necessary even when the populations are considered acceptable?
Sales Cycle Solutions-7
Problem 12-27, page 405
The following are auditor judgments and audit sampling results for six populations. Assume large
population sizes.
1
2
3
4
5
6
EPER (in percentage)
2
0
3
1
1
8
TER (in percentage)
6
3
8
5
20
15
ARACR (in percentage)
5
5
10
5
10
10
100
100
60
100
20
60
2
0
1
4
1
8
Actual sample size
Actual number of exceptions
in the sample
REQUIRED
a. For each population, did the auditor select a smaller sample size than is indicated by using attribute
sampling tables for determining sample size? Evaluate, selecting either a larger or smaller size than
those determined in the tables.
b. Calculate SER and CUER for each population.
c. For which of the six populations should the sample results be considered unacceptable? What options
are available to the auditor?
d. Why is analysis of the exceptions necessary even when the populations are considered acceptable?
Sales Cycle Solutions-8
EXPECTED
POPULATION
DEVIATION RATE (IN
PERCENTAGE)
2
TOLERABLE DEVIATION RATE
(IN PERCENTAGE)
4
5
6
7
8
9 10 15
3
20
5 PERCENT RISK OF OVER RELIANCE (ARACR)
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
2.75
3.00
3.25
3.50
3.75
4.00
5.00
6.00
7.00
149
236
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
99
157
157
208
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
74
117
117
117
156
156
192
227
.
.
.
.
.
.
.
.
.
.
.
.
59
93
93
93
93
124
124
153
181
208
.
.
.
.
.
.
.
.
.
.
49
78
78
78
78
78
103
103
127
127
150
173
195
.
.
.
.
.
.
.
42
66
66
66
66
66
66
88
88
88
109
109
129
148
167
185
.
.
.
.
36
58
58
58
58
58
58
77
77
77
77
95
95
112
112
129
146
.
.
.
32
51
51
51
51
51
51
51
68
68
68
68
84
84
84
100
100
158
.
.
29
46
46
46
46
46
46
46
46
61
61
61
61
61
76
76
89
116
179
.
19
30
30
30
30
30
30
30
30
30
30
30
30
30
40
40
40
40
50
68
14
22
22
22
22
22
22
22
22
22
22
22
22
22
22
22
22
30
30
37
Sales Cycle Solutions-9
2
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
2.75
3.00
3.25
3.50
3.75
4.00
4.50
5.00
5.50
6.00
7.00
7.50
8.00
8.50
EPDR
3
4
5
6
7
8
9
10
15
20
10 PERCENT RISK OF OVER RELIANCE (ARACR)
114
194
194
265
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
76
129
129
129
176
221
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
57
96
96
96
96
132
132
166
198
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
45
77
77
77
77
77
105
105
132
132
158
209
.
.
.
.
.
.
.
.
.
.
.
.
.
38
64
64
64
64
64
64
88
88
88
110
132
132
153
194
.
.
.
.
.
.
.
.
.
.
32
55
55
55
55
55
55
55
75
75
75
94
94
113
113
131
149
218
.
.
.
.
.
.
.
28
48
48
48
48
48
48
48
48
65
65
65
65
82
82
98
98
130
160
.
.
.
.
.
.
25
42
42
42
42
42
42
42
42
42
58
58
58
58
73
73
73
87
115
142
182
.
.
.
.
22
38
38
38
38
38
38
38
38
38
38
52
52
52
52
52
65
65
78
103
116
199
.
.
.
15
25
25
25
25
25
25
25
25
25
25
25
25
25
25
25
25
34
34
34
45
52
52
60
68
11
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
25
25
25
25
32
Sales Cycle Solutions-10
ACTUAL NUMBER OF DEVIATIONS FOUND
SAMPLE SIZE
0
25
30
35
40
45
50
55
60
65
70
75
80
90
100
125
150
200
11.3
9.5
8.2
7.2
6.4
5.8
5.3
4.9
4.5
4.2
3.9
3.7
3.3
3.0
2.4
2.0
1.5
1
17.6
14.9
12.9
11.3
10.1
9.1
8.3
7.7
7.1
6.6
6.2
5.8
5.2
4.7
3.7
3.1
2.3
2
3
4
5
6
7
8
9
5 PERCENT RISK OF OVER RELIANCE
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
19.5
.
.
.
.
.
.
.
16.9
.
.
.
.
.
.
14.9 18.3
.
.
.
.
.
13.3 16.3 19.2
.
.
.
.
12.1 14.8 17.4 19.9
.
.
.
.
11.0 13.5 15.9 18.1
.
.
.
10.1 12.4 14.6 16.7 18.8
.
.
9.4 11.5 13.5 15.5 17.4 19.3
.
8.7 10.7 12.6 14.4 16.2 18.0 19.7
8.2
7.7
6.8
6.2
4.9
4.1
3.1
10.0
9.4
8.4
7.6
6.1
5.1
3.8
11.8
11.1
9.9
8.9
7.2
6.0
4.5
13.5
12.7
11.3
10.2
8.2
6.9
5.2
15.2
14.3
12.7
11.5
9.3
7.7
5.8
16.9
15.8
14.1
12.7
10.3
8.6
6.5
18.4
17.3
15.5
14.0
11.3
9.4
7.1
20.0
18.8
16.8
15.2
12.2
10.2
7.7
10
.
.
.
.
.
.
.
.
.
.
.
.
18.1
16.4
13.2
11.0
8.3
Sales Cycle Solutions-11
Sample size
ACTUAL NUMBER OF DEVIATIONS FOUND
0
1
2
3
4
5
6
7
8
9
10
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
17.9
15.7
14.0
12.7
10.6
8.0
6.4
19.5
17.2
15.3
13.8
11.6
8.7
7.0
.
.
.
.
.
.
.
.
.
.
10 PERCENT RISK OF OVER RELIANCE
20
25
30
35
40
45
50
55
60
70
80
90
100
120
160
200
10.9
8.8
7.4
6.4
5.6
5.0
4.5
4.1
3.8
3.2
2.8
2.5
2.3
1.9
1.4
1.1
18.1
14.7
12.4
10.7
9.4
8.4
7.6
6.9
6.3
5.4
4.8
4.3
3.8
3.2
2.4
1.9
.
19.9
16.8
14.5
12.8
11.4
10.3
9.4
8.6
7.4
6.5
5.8
5.2
4.4
3.3
2.6
.
.
.
18.1
15.9
14.2
12.9
11.7
10.8
9.3
8.3
7.3
6.6
5.5
4.1
3.3
.
.
.
.
19.0
17.0
15.4
14.0
12.9
11.1
9.7
8.7
7.8
6.6
4.9
4.0
.
.
.
.
.
19.6
17.8
16.2
14.9
12.8
11.3
10.1
9.1
7.6
5.7
4.6
.
.
.
.
.
.
.
18.4
16.9
14.6
12.8
11.4
10.3
8.6
6.5
5.2
.
.
.
.
.
.
.
.
18.8
16.2
14.3
12.7
11.5
9.6
7.2
5.8
18.6
16.6
15.0
12.5
9.5
7.6
Sales Cycle Solutions-12
12-27 The sample sizes and CUERs are shown in the following table:
a. The auditor selected a sample size smaller than that determined from the tables in population 1 and 3. The effect of selecting a
smaller sample size than the initial sample size required from the table is the increased likelihood of having the computed upper
exception rate exceed the tolerable exception rate. If a larger sample size is selected, the result may be a sample size larger than
needed to satisfy tolerable exception rate. That results in excess audit cost. Ultimately, however, the comparison of CUER to
tolerable exception rate determines whether the sample size was too large or too small.
1.
2.
3.
4.
5.
6.
Actual
Initial Sample Size Sample Exception CUER from
Sample Size from Table 13-7
Rate (SER)
Table 13-8
100
127
2.0%
6.2%
100
99
0.0
3.0
60
65
1.7
6.3
100
93
4.0
8.9
20
18
5.0
18.1
60
60
13.3
>20.0
b. The sample exception rate and computed upper exception rate are shown in columns 4 and 5 in the above table.
c. The population results are unacceptable for populations 4 and 6. In each of those cases, the CUER exceeds tolerable
exception rate. In population 1, the CUER is marginally more than the TER.
d. The auditor’s options are to change tolerable exception rate or ARACR, increase the sample size, or perform other
substantive tests to determine whether there are actually material errors in the population. Increasing sample size would
not likely result in improved results for either population 4 or 6 because the CUER exceeds tolerable exception rate by a
large amount.
e. Analysis of exceptions is necessary even when the population is acceptable because the auditor wants to determine the
nature and cause of all exceptions. If, for example, the auditor determines that an error was intentional, additional action
would be required even if the CUER was less than tolerable exception rate.
Sales Cycle Solutions-13